The administration budget for fiscal year 2017 includes a broad
range of aggressive spending proposals supporting President
Obama's policy concerns. To comply with recent budget
agreements, it also includes tax provisions that would result in
$2.8 trillion in additional receipts over the next 10 years.
Presidential budgets are often best seen as aspirational documents
and do not necessarily translate into legislation on either the
spending or tax side. However, this budget, which begins on Oct. 1,
2016, serves to keep a number of ideas on the table into the
November elections, and some of its provisions could be considered
by this or future Congresses.
Nonetheless, the government remains deeply divided, with
Republicans controlling Congress. The president's previous
budgets have typically had a cool reception on Capitol Hill, but
the latest version is being greeted with open hostility. In fact,
the House and Senate Budget Committee chairs have already noted that they will not invite the
director of the Office of Management of Budget to testify on the
budget ― an unprecedented move.
But the budget can still be important. The Obama
administration's spending proposals reflect Democratic party
policy, and the current Democratic presidential candidates have
included some tax and spending proposals in their platforms. On the
tax side, Hillary Clinton, for example, has embraced proposals
aimed at high-income taxpayers, including the "Buffet
rule" minimum tax and a limit on the value of itemized
deductions.
Although not much legislative action is expected in an election
year, less-controversial proposals can gain traction. Several of
the president's budget initiatives from fiscal year 2016, such
as making the R&D credit and Section 179 small business
expensing permanent, were passed by strong majorities of both
houses of Congress as part of the Protecting Americans from Tax
Hikes (PATH) Act of 2015. Administrative and revenue-raising
provisions in the budget, such as filing deadline changes and
reporting new estate asset values, were also enacted last
year.
The budget's continued focus on the need to reform the
corporate tax system, in particular the taxation of international
activities of U.S. corporations, should also be noted. Although the
approaches taken in the budget differ vastly from the mostly
Republican proposals that have been discussed in Congress, the
ongoing attention to this area suggests it will continue to be a
focus of tax reform.
The 2017 budget includes several significant tax provisions that
taxpayers should carefully evaluate. Although these provisions may
not be enacted into law in the current Congress, they are likely to
resurface as Democratic proposals no matter who is elected to the
White House in November.
Revenue raisers
As in previous years, the lion's share of new revenue comes
from proposals aimed at international taxes and high-income
taxpayers.
The budget recycles a bevy of international proposals that this
year are estimated to raise almost $484 billion in revenue. They
are highlighted by a 19% minimum tax on the foreign earnings of
U.S. multinationals and a 14% tax on repatriated earnings. The
administration's provisions aimed at high-income taxpayers are
headlined by four familiar proposals:
- Change the taxation of carried interest in a partnership
- Impose a 30% Buffet rule minimum tax
- Limit the value of itemized deductions to 28%
- Increase the tax rate on capital gains and dividends to 28%
The budget is also aimed at addressing the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting project, known as BEPS. As with last year's budget, the fiscal year 2017 budget aims to strengthen Subpart F and restrict the use of hybrid mismatch arrangements that prevent the taxation of income in any jurisdiction. The budget also aims to address corporate inversions, which have dogged Congress in the past several years.
Medicare and self-employment tax
The administration this year also added a $272 billion proposal
that is meant to close the gap between Self-Employment
Contributions Act (SECA) taxes and the 3.8% tax on net investment
income (NII). Under current law, a limited partner who materially
or significantly participates in a partnership may not be required
to pay either SECA or NII taxes. Similarly, an S corporation
shareholder who is not passive in the S corporation does not pay
employment or NII taxes on any distribution that is not treated as
reasonable compensation.
The proposal would require all income from a trade or business that
is not subject to SECA tax to be subject to the NII tax, and it
would deposit all revenue from the NII tax into the Medicare
Hospital Insurance Trust Fund. If would also provide a uniform set
of standards, regardless of the type of entity for determining what
is self-employment income. This would expand the reach of SECA
taxes for many taxpayers under the NII tax thresholds, while
providing a standard way to determine whether income is subject to
SECA or NII tax for those over the threshold.
Oil and gas
One of the more controversial proposals in the president's budget is a new $10.25 excise tax or fee per barrel of oil. The revenue, much like a gas tax, would be used to fund transportation. Despite historically low gasoline prices, the administration and Congress have long opposed gas taxes. As in past years, the budget proposal would repeal essentially every tax benefit for oil, gas and other mining operations, though the declining price of oil reduced the estimated revenue from these changes to $38 billion this year.
Compensation and benefits
The administration proposed two new notable changes in the
compensation and benefits area. First, the administration proposes
allowing unaffiliated employers to participate in a single
multi-employer defined contribution retirement plan.
The second change is meant to salvage the wildly unpopular
"Cadillac" excise tax on high-cost health care plans. The
tax was enacted as part of Affordable Care Act (ACA) in 2010 and
was originally scheduled to take effect in 2018. The PATH Act
signed in December delayed it until 2020, but all the presidential
candidates from both parties have pledged to repeal it before it
takes effect.
The administration is seeking to soften the tax's blow by
allowing the cap on health care costs to be adjusted by the state.
It would also make some allowances for calculating how much
flexible spending arrangements count toward the cap. Some of the
fiercest opponents of the tax have indicated that this compromise
would not be acceptable.
IRS budget
In the budget, the administration requests $11.8 billion for IRS
funding for the fiscal year, which is $530 million (or 4.7%) more
than in the 2016 fiscal year. The administration also requests an
adjustment to the IRS's program integrity funding cap, seeking
$515 million in the 2017 fiscal year that can be earmarked for tax
enforcement and compliance activities. The administration expects
such measures to contribute to reducing the so-called "tax
gap" by potentially billions of dollars over the next several
years.
IRS funding is likely to remain a relatively hot issue, however. As
one of the primary agencies for administering the ACA ―
legislation that still remains deeply unpopular with the
Republican-controlled Congress ― as well as an agency still
mired in controversy over its handling of tax exemption
applications by certain conservative groups, the IRS has undergone
dramatic funding cuts over the past several years. IRS funding
levels decreased from approximately $13.4 billion in 2010 to $10.9
billion in 2015, which led to a cut in staffing and taxpayer
services.
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